Convertibles illiquid; Newmont Mining dips on hedge as gold jumps; NatCity thinly traded, stock off

By Rebecca Melvin

New York, Sept. 22 - The convertible bond market remained illiquid on Monday, with some trades sparked by a rise in commodities like gold and oil, but with overall convertibles activity curtailed amid the short-selling ban and latest installment of government intervention aimed at healing the reeling financial markets.

"There was a new rule this morning that creates a lot more administrative reporting work," a West Coast-based buyside convertibles trader said. "Most of my time is now spent being compliant."

The trader was referring to requirements to report weekly positions. In addition, the temporary short-selling ban on financials that came into effect Friday is a game-changer, sources said.

National City Corp., for example, was a name to watch after Goldman Sachs upgraded the regional bank to "buy" from "neutral" on expectations it stands to benefit from new government intervention; but the buysider said: "You don't really care. It creates a bid in the common. But you can't do anything about it."

Regarding additional names added to the list this week, the trader said, "They may eke out a few more names to the list that were overlooked, but I can't see them extending it much more."

The list was expanded by 30 from the initial 799 companies and now includes such names as General Motors Corp., he said.

"Still, I can't do a trade today for fear they'll do something tomorrow that makes me come up on the wrong side of the deal," he added.

Newmont Mining Corp. was higher outright but was lower on a hedged basis as Monday saw a continuation of Newmont trades from Friday's market as gold prices rose 5% to $909 an ounce in New York.

Those bonds were called worse on a hedged basis, however, as investment-grade names overall were weaker.

"I believe that it is because that is the only place sellers could find bids," a New York-based sellside trader said.

Transocean Inc. was also in play as crude oil climbed more than $25 a barrel.

Newmont worse on hedge

Newmont Mining's 1.625% convertible senior notes due 2017 traded at 108.65, which was up from about 106 on Friday, as its shares climbed, but was lower compared to Thursday.

Shares of the Denver-based gold mining company (NYSE: NEM) jumped 6%, or $2.58, to $44.43 on Monday.

Newmont Mining's 1.25% convertible due 2014 was at 108 on Monday. Last Thursday, the Newmont paper was at 109 and 113, respectively, versus a stock price of $42.75.

Gold extended gains Monday following its biggest weekly gain in almost nine years last week as investors looked to switch assets into precious metals as a haven from market turmoil.

Transocean, which is a high vega name that tends to go up with volatility, saw increases from last Thursday and Friday.

Transocean's 1.625% convertible due 2037 traded at 101.25 versus a share price of $128.00, which compared to 99 versus a stock price of $115.80 on Thursday.

The Transocean series B 1.5% convertibles due 2037 were seen closing at 101 versus a share price of $128, which was toward its highs for the day, compared to 98 Thursday, while the Transocean series C 1.5% convertibles due 2037 traded at 100.5 Monday versus the same share price, compared to 97 last Thursday.

Transocean common stock (NYSE: RIG) closed flat, or down a penny, at $125.39.

Crude oil for October delivery rose $16.37, or 17%, to settle at $120.92 a barrel at 2:46 p.m. ET on the New York Mercantile Exchange. It was the highest settlement price since Aug. 21. Futures for November delivery rose 6.4% to settle at $109.37 a barrel.

Prices climbed as traders who sold the October contract last week, when oil dipped to close to $90, had to buy the futures back. It was a squeeze play in which traders had gone short by selling contracts hoping the price would decline.

NatCity little changed

Shares of National City opened higher on Monday after the Goldman Sachs upgrade but immediately fell as uncertainty over the details about the government's plan to buy $700 billion in banks' mortgage debt.

Goldman upgraded to "buy" from "neutral" based on the view that banks with low marks and excess capital will benefit the most in the new financial landscape.

Goldman said it saw an ongoing need for some banks to take writedowns due to having loans marked at 90% to 95% of par. But National City's share price target was raised to $7 from $5.

Also on Monday, National City announced that it was converting its series G convertible preferred stock, issued in April, into common stock.

Shares of the Cincinnati-based regional bank (NYSE: NCC) actually closed down 54 cents, or nearly 10%, at $5.07. But National City's 4% convertible senior notes due 2011 were called little changed, having last traded at 69 bid, 70 offered.

Bank of America Corp. shares (NYSE: BAC) fell a similar 9%, or $3.33, to $34.15. The Charlotte, N.C.-based bank was reportedly beset by how to retain Merrill's 16,000 financial advisers with both pay and culture that are appealing.

Bank of America has been the fodder for considerable convertibles trading, but it is also on the banned list. Nevertheless, it traded at 86 versus a stock price of $35.00 on Monday.

Short sale limits questioned

Maybe it was someone who had to sell a position, or it could have been an outright, according to one source. But by and large, convertibles players are saying "who cares" about company-specific news since there is little demand for these financial names if they can't be hedged.

"I definitely feel they are changing the rules in the middle of the game. And there are a number of implications: you're telling people you can't affect the stock price, but you had all that Bank of America and all the convertible preferreds, which were the primary source of new issuance for the year today, and people on Friday were 10 points wide. People are afraid to sell into a crappy bid, and they can't reestablish it; they can't re-buy," the trader said.

"People got used to the information. But it's not doing what it was supposed to do. It was supposed to be a reprieve. Over the weekend would have been good, but it's not practical to extend it or the viability of the strategy is at risk," he said.

Furthermore if you take that strategy away you threaten to take away a source of financing for these small regional banks that is found in the hedge funds, he said.

If they can't short their stock, then the banks aren't going to be able to sell $1 billion of convertible preferreds into the market, he said.

With all the reporting rules for anything starting today going forward, the trader predicted that transactions would start being a lot smaller.

"If you can't conduct hedging activities, you've lost a buyer in the market, you've lost a participant," the buysider said.

A West Coast-based sellside trader concurred: "... still very little liquidity to our market. If names do trade, they are typically large-cap/investment-grade names where people feel there is less risk, often trading outright."

"The irony here," he continued, "is that because these names are better credits, there is some liquidity; and because there is some liquidity, these names are the names coming in"

"The short ban is not helping matters either. Another irony in this crazy financial world is that as the government looks for viable solutions to solve the credit crisis, they handicap one of the few products available to raise capital for companies by restricting short sales."

The sellsider concluded by saying: "I am sure much of this will all be worked out, but until it does, the convert market is a tough place trade right now."

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